Fiscal and Monetary Policy and Economic Fluctuations

Fiscal and Monetary Policy and Economic Fluctuations The global economy was relatively doing fine more than five years ago before it was hit by economic downturn or recession. During this period, the American economy was at its peak, particularly in the fourth quarter of 2007. However, this was followed by a mild recession at the beginning of 2008, which eventually turned into a severe credit crisis across the world approximately one year later.

While only a few countries escaped the economic recession, virtually no country could avoid the severe bear markets in stock (Norris, 2012). Some countries like the United States experienced changes in gross domestic product and stock markets. Since it has the best record of the main developed countries, the United States was severely affected by the recession. As the economic downturn came to end, America started the process of recovery from the effects of the recession.

This recovery process has been characterized by changes and economic fluctuations in various aspects including interest rates, unemployment rate, and inflation within the past five years. Current Economic Situation in the U.S.: As compared to five years ago, the U.S. economy has been resilient as it continues to recover from the effects of the economic downturn and ruins to an improved health. Currently, the country's economy is weathering federal budget reductions and higher payroll taxes.

Moreover, economic growth is picking up to an extent that some economists predict that the already five-year expansion may last longer (Klimansinska & Chandra, 2013). The signs of U.S. economic resilience are evident across the board such as continued spending by households, rebound of home sales, increased investment and hiring by businesses, and the surge in the automobile industry. As America's economy continues to shed the excesses of the past like unprecedented levels of consumer and corporate debt, banks have healthier balance sheets while credit is slowly easing.

Generally, the United States economy is growing albeit at a slow pace of a listless 2% annually. However, the recent resilience of America's economy has not been reflected in interest rates, inflation, and unemployment rate. The rate of inflation in the United States declined to a 4-year low in October 2013 and reached its lowest rate since October 2009. According to recent releases, the inflation rate in the United States eased to 1% in October 2013, which was a 0.2% decline from the previous month.

Interest rates in the United States have continued to rise, particularly on 10-year Treasury bonds. In February this year, these rates had risen to 2.27%, which was an indication of approximately 10% loss in the price of the bond. Nonetheless, the Federal Reserve has kept the interest rate on long-term bonds to an unexpected low through its unconventional monetary policy. This implies that the main reason for the current interest rates is the unconventional monetary policy i.e.

quantitative easing regarding the purchase of huge amounts of Treasury bonds and other long-term assets. On the contrary, the unemployment rate has remained extremely high at around 7.3% from its peak of 10% in October 2009. While there has been a significant decline in the current rate of unemployment as compared to five years ago, it is still relatively high. The decline in the rate of unemployment in the past five years is attributed to the addition of jobs by employers, though most of them are part-time and low-paying.

This rate is also fueled by the decline in portion of Americans searching for jobs or working because of retirement or discouragement (Davidson, 2013). Strategies to Encourage Consumer Spending: Due to the current state of the economy, encouraging people to spend money through appropriate strategies could help promote economic growth. One of the major strategies to encourage people to spend money to stimulate economic growth is to raise the minimum wage. Generally, minimum wage provides low-wage workers with more money who in turn spend it in local communities.

According to research findings, raising the minimum wage encourage people to spend money, which increases the demand that promotes economic growth ("Minimum Wage as Economic Stimulus," n.d.). For instance, the Chicago Federal Reserve Bank found in 2011 that minimum wage increases people's incomes and eventually their spending, particularly in triggering car purchases. The second strategy is tax cuts, which basically involves reducing taxes in order to improve the economy and encourage consumer spending.

Tax cuts would encourage people to spend money and promote economic growth because it increases disposable income, which allows an individual to spend extra money. It contributes to more spending because it pushes out the aggregate demand curve due to people's demand for more products and services with higher disposable incomes. These strategies will have significant effects on inflation rates, interest rates, and the rate of unemployment.

The increase in minimum wage will ensure that the addition of jobs by employers would not be on low-paying, part-time jobs but well-paying jobs that enable the low-skilled workers to have high disposable income. On the other hand, tax cuts contributes to an increase in interest rates and.